"Minority homeowners
have been disproportionately affected by the foreclosure
crisis and stand to lose homes at a faster pace than white
borrowers in the future, according to a report released
Friday by a nonprofit research group. … The 'analysis
suggests dramatic differences in how the foreclosure crisis
has affected racial and ethnic groups,' the report said.
'African American and Latino borrowers
have borne and will continue to
disproportionately bear the burden of foreclosures.' "

But defaults couldn't possibly be
the fault of the defaulters, if the defaulters are
minorities, could they? So instead, Felix Salmon of Reuters
asks
Are foreclosures racists?June 18, 2010:

"If you're a high-income Latino with a mortgage, you're
almost twice as likely to be facing foreclosure than a
high-income non-Hispanic white person. And in general, the
foreclosure crisis is hitting blacks and Latinos much harder
than it is whites, according to a startling
new report from the Center for Responsible Lending."

Now, you might think that
foreclosure rate has something to do with, say, blacks and
Hispanics having
remarkably fewer financial assets to use as safety
cushions in case housing prices don't continue to rise.
After all, a 2007 Federal Reserve Board report to Congress (PDF)
noted:

"Black and Hispanic families are less likely than
non-Hispanic white families to have any financial assets, so
the disparity in median financial assets for all families
(rather than just those with financial assets) is even
larger, with the overall medians for black and Hispanic
families roughly 5 percent to 7 percent of the non-Hispanic
white median."

Moreover, African-Americans and
Latinos are less likely than whites to have
prosperous
relatives who can help them out with a loan if they are
in danger of defaulting.

You might think that, but being
aware of those facts just shows you are a racist. Salmon [Email
him] writes:

"I'll hazard a guess and say that this probably has
something to do with a lot of middle- and high-income
Latinos in California and Arizona being
sold subprime mortgages, even when they qualified for a
prime loan."

The
Washington Post's
Merle agrees that discrimination is the cause:

"Research has shown that minority borrowers were more likely
to receive subprime loans during the housing boom even if
they had credit scores, incomes and loan sizes similar to
those of whites. Some housing experts say that minority
borrowers received higher rates on subprime loans compared
with similarly situated white borrowers, resulting in higher
monthly payments and quicker defaults.

"'I think it reflects that minority borrowers were
targeted by the sellers of these [risky] mortgages,'
said Barry Zigas, director of housing and credit policy at
the Consumer Federation of America."

But if blacks and Hispanics were
more creditworthy than lenders were giving them credit for being,
then they'd have lower
foreclosure rates than whites, right? But this report is
about how they have higher foreclosure rates. (This point was first
made
in Forbes magazine
by Peter
Brimelow and Leslie Spencer back in 1993—when it could
have saved us all
a lot of
trouble).

In fact, blacks and Hispanics have
even worse
foreclosure rates than this study claims. Although the
Post and Salmon
don't mention it, the report
flat-out admits that its crude methodology
underestimates the gap in default rates between whites and
Non-Asian Minorities:

"Like all estimates, ours has limitations. Most importantly,
our method only captures differences in foreclosure rates
between racial and ethnic groups that are due to differences
in distributions of loans along the four dimensions that we
use when calculating foreclosure rates (i.e. loan year,
state, occupancy and loan segment). … Within the list of
potential factors not included in our analysis, several tend
to be associated with both higher foreclosure rates and
borrowers of color. As a result, our results are likely to
underestimate racial and ethnic disparities …"

The three researchers from the
Center for Responsible Lending (Debbie Gruenstein Bocian,
Wei Li, and Keith S. Ernst) don't actually have data on
foreclosures by race. Instead, they have federal data by
race on who receives mortgages
and they have private data on who fails to pay them back (but the
foreclosure data doesn't mention the race of the defaulter).
Instead, the CPL is, as they confess,
"implicitly assuming"
that the foreclosure rates are identical across races for
each type of loan (e.g., 2006 California owner-occupied
subprime).

Fortunately, other researchers have
actually done the hard work of matching public race
information with private foreclosure information, mortgage
by mortgage. And they have found the CPL's assumption of
racial equality in foreclosure rates within segments to be
wrong.

For example, the 2008 study
Lending in Low- and Moderate-Income Neighborhoods in
California (PDF)
by Dr. Elizabeth Laderman and Dr. Carolina Reid of the San
Francisco Federal Reserve Bank calculated foreclosure rates
by race on 239,000 mortgages in California handed out during
the Bubble:

They concluded:

"We also find that race has an independent effect on
foreclosure even after controlling for borrower income and
credit score. In particular, African American borrowers were
3.3 times as likely as white borrowers to be in foreclosure,
whereas Latino and Asian borrowers were 2.5 and 1.6 times
respectively more likely to be in foreclosure as white
borrowers."

The March 2004 report
Analysis of FHA Single-Family Default and Loss Rates
for the Department of Housing and Urban Development by
Robert F. Cotterman showed that black and Hispanic default
rates on Federal Housing Administration mortgages handed out
in the 1990s were more than twice as bad as the white rate.
Even when adjusted for FICO scores and other objective
factors related to credit risk, minority default rates still
look worse.

Cotterman observes:

"Blacks, Hispanics, and those in judicial foreclosure states
and underserved areas have higher conditional loss rates,
other things the same."

Minority default rates are not a
minor technical issue. The volume of lending to minorities
during the Housing Bubble was much vaster than is widely
understood. According to the federal Home Mortgage
Disclosure Act
database, minorities received
half of all subprime mortgage dollars nationally during
the 2004-2007 Housing Bubble. At the Ground Zero of the
disaster, California in 2006, minorities got
77
percent of all home purchase subprime dollars and 56
percent of total home purchase dollars.

Mortgages were the fundamental units
out of which the financial industry,
private
and
public, built their pyramid schemes.

It's time once again to trot out the
biggest cliché in all of journalism: philosopher George
Santayana's
observation that

"Those
who cannot remember the past are condemned to repeat it."

Here we are, almost three years
after the subprime market tanked in the
summer of 2007 and 20 months after the economy as a
whole followed subprime down the drain. And our country's
big guns are still trained not on learning from our
mistakes, but on continuing to obliterate supposed
stereotypes about the creditworthiness of minorities—the
same obsolete obsession that helped get us into this mess.

This isn't to say that the
subprime-initiated mortgage meltdown was the
only cause of the
crash, or that the crash wouldn't have happened later
anyway. What I'm saying is that mortgages were the
direct impetus of
the economic disaster, just as the Wall Street Crash of
October 1929 led to the Great Depression or the
assassination of
Archduke Franz Ferdinand in the summer of 1914 was the
direct cause of the Great War. Similarly, America may well
have eventually gotten involved in WWII if
Pearl Harbor had never happened, but
Pearl
Harbor was the
direct cause of our entry into the Second World War.

In the cases of 1914, 1929, and
1941, a huge amount of intellectual effort has been devoted
to understanding these precipitating events. In contrast,
the Main Stream Media account of the causes of the Housing
Bubble and Bust are still severely lacking, largely because
everybody who was anybody—e.g.,
Bill Clinton,
George
W. Bush, and
Barack Obama—were all in essential agreement that
minorities should get more mortgage dollars.

And they were all wrong.

Unfortunately, public discourse in
modern America mostly doesn't exist to find answers to
important questions. Instead, it exists to furnish talking
points to partisans for attacking other partisans. Since
there was broad agreement that minorities should borrow
more, nobody is in any hurry to revisit this
bipartisan blunder.

Consider the Federal Reserve Board
dissertation from which I quoted above:

Submitted to the Congress pursuant to section 215 of the
Fair and Accurate Credit Transactions Act of 2003

August
2007

The second paragraph of this Fed
study mandated by the 2003 Equal Credit Opportunity Act
(ECOA) explains that it was done to determine if
"credit-scoring
models may have adverse effects on certain populations,
particularly minorities". The legal
Theory of Disparate Impact states that any evidence of
black or Latino underperformance in anything is evidence
of "discrimination" unless rigorously proved otherwise.

But, as this graph from the Fed
study of 301,536 individuals' credit history through 2003
shows, blacks and Hispanics had lower credit ratings on
average (using a 0 to 100 scale devised by the Fed
researchers).

In other words, the Fed spent the
Housing Bubble years of 2003-2007 compiling a 304-page
report demanded by Congress on whether credit scoring
systems (e.g., FICO scores) were irrationally preventing
minorities from borrowing enough.

This report wasn't worked on from
1963 to 1967, when the Civil Rights movement triumphed, but
from 2003 to 2007, a period in which exactly the exact
opposite problem—minorities being loaned
more than they could afford to repay—was about to bring down the
American economy.

I've
called that the Guns of Singapore Syndrome—although
that's unfair to the otherwise incompetent British
commanders who lost that city in early 1942 in what Winston
Churchill called the
"worst disaster" in the history of the British
Empire. The British had famously installed
15" coastal cannons aimed to protect Singapore from
attack by sea from the south, only to have the Japanese army
attack by land from the north. (Actually, the British did
manage to
swivel most of the guns around—although, unfortunately,
they were furnished largely with armor-piercing
anti-battleship shells ineffective against infantry).

In contrast, our elites haven't
managed to swivel much at all. They're
still acting as if it's 1967 and the perceived problem
is discrimination against minority borrowers. They'll go so
far as to change the name of what they are denouncing from
"redlining"
(the bête noire of
the Clinton and Bush Administrations) to
"reverse
redlining" (what
Obama is out to stomp), but that's it. They aren't going
to learn anything. They are simply allergic to facts.

Now, you might think that it would
have been more sensible for Congress to have the Fed study
why minorities were getting so many loans they couldn't pay
back. But, no, our Guns of Singapore are permanently
pointing out to sea.

For instance, that
2007 Fed study of the credit scores and repayment
performance on all types of credit over the subsequent 18
months found that rather than credit scoring having an
unfair impact on blacks, blacks had an unfair impact on
credit scoring. The biggest problem with the predictive
validity of credit scores turned out not to be that they
were biased against African-Americans, but that credit
scores were biased in
favor of African-Americans. Blacks not only had lower
average credit scores, but they were significantly less
likely to repay their loans than whites
with the same scores:

"The analysis conducted for this study finds that credit
scores consistently predict relative loan performance
within all population groups; that is, for all populations,
the percentage of individuals experiencing a serious
delinquency on one or more of their credit accounts
consistently declines as credit scores increase….

"The analysis also
finds that some groups perform worse (experience higher
rates of serious delinquency) on their credit accounts, on
average, than would be predicted by the performance of
individuals in the broader population with similar credit
scores. For example, on average, blacks perform worse than
other racial and ethnic groups with similar credit scores."

In other words, FICO scores work
overall within groups at predicting likely deadbeats. The
problem is between groups—but the bias is in the
opposite direction
of what Congress wanted to find!

You've probably read a lot about
credit over the last three years. How often have you heard
the conclusions of this 2007 Fed study mentioned?